It's not a myth: the middle class has been falling sharply in economic status

One of the great mysteries about the U.S. economy today is the discrepancy between the objective and subjective pictures we have of the middle class. The numbers say that the middle class is doing OK or even improving its lot; middle class families themselves say they're being crushed under economic hobnail boots.

Two economists at the Federal Reserve Bank of St. Louis have found the reason for the disconnect. It's a matter of definition, not statistics, according to William R. Emmons and Bryan J. Noeth, whose analysis has just been published by the bank. Their basic findings are that, yes, median income -- that is, income in the middle of the distribution -- has been stable; but the middle class genuinely is falling behind that mark. In America, middle class has been defined downward.

The disconnect comes from the different approaches of economists and sociologists to defining the middle class. Economists do it by the numbers, typically defining the middle class as households with income roughly 50% higher and lower than the median. Based on a median income of about $52,000 in 2013, the latest figure from the Census Department, that places the middle class in a range of $26,000 to $78,000.

Sociologists, according to Emmons and Noeth, define the middle class "by evaluating demographic dimensions like race, education, occupation, and status."

They combine the approaches and solve the mystery. In effect, they've shifted from defining middle class as merely anyone earning a middle-income to defining the class as a fairly stable demographic group and looking at how it's doing relative to middle income.

In effect, the bar has been rising to remain near the middle of the income and wealth distributions.— William R. Emmons and Bryan J. Noeth, Federal Reserve of St. Louis

By defining the middle class demographically, they find that families falling into the murky category of "neither rich nor poor" are under much more crushing economic pressure than the sheer numbers indicate.

"In effect," they write, "the bar has been rising to remain near the middle of the income and wealth distributions."

Let's start with the economists' view of middle class. If it's those at or around middle income, then the position of those families hasn't improved or deteriorated much over time. Adjusted for inflation, U.S. median income was about $48,000 in 1984, peaked at $56,900 in 1999, then settled back to $52,000 in 2013. The non-inflation-adjusted figure has been on a steady rise from $22,400 in 1984. (See accompanying chart.)

St. louis Federal Reserve

U.S. median household income has risen steadily since 1985 (blue line); but adjusted for inflations it has barely budged (red line). Shaded areas represent U.S. recessions.

U.S. median household income has risen steadily since 1985 (blue line); but adjusted for inflations it has barely budged (red line). Shaded areas represent U.S. recessions. (St. louis Federal Reserve)

Who are these families? Emmons and Noeth examined the characteristics of households headed by someone aged at least 40, since younger families may not have completed their education or settled into long-term earning and wealth patterns. They define middle-class households as those with near-average income and wealth, headed by a white or Asian with a high-school diploma, no more or less, or by a black or Hispanic with a two- or four-year college degree.

These households are sandwiched between "thrivers," families with above-average income or wealth, headed by someone with a two- or four-year college degree "who is non-Hispanic white or Asian"; and "stragglers," headed by someone without a high school degree or, if black or Hispanic, a high school diploma at most.

One laudable feature of this breakdown is that it puts the socio- into socioeconomic by recognizing the effect of ethnicity on economic status. Whether because of discrimination or other factors, the authors acknowledge that black and Hispanic families "have significantly lower income and wealth than their similarly educated white and Asian counterparts."

By measuring the income and wealth of each of those groups against the economists' median standard, the authors show exactly what's happened to the economics of American households. The median income of the demographically defined middle class hasn't been as stable since the 1980s as the numbers suggest. It's 16% lower now than it was in 1989; relative to the overall U.S. median, it's down by 21%. To put it another way, the sociologically defined middle-class family ranked at the 55th percentile of U.S. income earners in 1989; by 2013 it had fallen to the 45th percentile. If you're riding in that car, it's a steep drop.

The same trend shows up in wealth; the middle class has fallen short by about 24% of overall median wealth since 1989.

As for what all this means, the analysis by Emmons and Noeth underscores the importance of higher education in improving household status. That's a crucial insight for policy-makers, who have been complacently watching public higher education get ruthlessly squeezed by state governments and private higher ed priced out of the reach of the middle class.

Better-educated families, they add, make better financial decisions, which further enhances their standing. And discrimination and other factors that reduce educational attainment by blacks and Hispanics also speed those households' slide down the economic pole.